Cost & Price Analysis
As a result of the shale revolution in North America, the demand for chemicals used in well stimulation grew significantly, without a correspondent supply capacity increase. This, in turn, created an undersupplied market, that drove the prices up. When the supply picked up, prices stabilized and with the oil price slump, over-supply of chemicals is imminent. Those supply & demand swings will introduce price volatility for chemicals used in well stimulation.
Combined with offshore vessel price fluctuations and limited availability of dedicated offshore well intervention vessels with, price trends are very much dependent on the volumes and visibility of revenues. No contractor is willing to invest US$20M+ on a speculative basis and try and serve a spot market.
Daily rates vary significantly, depending on a number of variables, such as work duration and pumping performance requirements. In addition services, chemicals may be a significant cost contributor. On average, the cost of chemicals does not exceed 30%-40% of the stimulation cost. Yet, depending on the stimulation type and subsurface conditions, it may go as high as 70% of the well stimulation cost.
Prices are expected to continue sliding down in 2nd half of 2020 due to oversupply. Yet, this may be affected by contractors cold stacking, writing off their old and non-competitive assets
The overwhelming majority of the equipment is manufactured by third parties. Service providers build up their fleet based on their requirements. Depending on the company modus operandi, personnel rates may contribute to a significant proportion of the costs. There might be cases, when the vessel, being the most CAPEX intensive asset, will be on hire basis. In addition, chemicals used in well intervention are produced by major chemicals suppliers.
This category is a high fixed cost segment; hence sustained revenue generation for contractors is for utmost importance. Key cost drivers are:
- Acquisition cost is one of the biggest cos st for service companies. The average prices are:
- Purposes built or converted stimulation vessel - US$ 4m - US$ 10m ( if bought)
- Vessel charter rate per day ( if leased) - US$6k to US$10k
- Stimulation Equipment package - US$4M - US$15M. Various companies may have different pumping requirements and this, in turn, drive the costs.
- Maintenance costs - Maintenance costs are highly driven by the nature of the chemicals. The corrosive nature of the stimulation chemicals reduces the working life of equipment tremendously. Apart from that, the maintenance is geared towards routine and preventative programmes. In the case of vessel, maintenance requirements are governed by industry bodies and very comprehensive.
- Personnel costs - most of the personnel provided in offshore well stimulation are part of the vessel crew. On average, manpower costs in the marine industry constitute around 30% of the vessel charter rate and grow on average 3%-5% per year.
- Chemicals costs - the majority of chemicals used in well stimulation are highly commoditized. Both, Matrix Acidization and Acid Fracking use large quantities of hydrochloric acid (high concentration HCI), together with water and variety of chemicals including gels, proppants and other agents and additives. 75% of the demand for HCl has been driven by companies outside of the oil industry, such as PVC and polyurethane production, and around 25% made available for swimming pool disinfection, steel pickling, food industry, and others. If no supply capacity is created, prices for HCI will be volatile and will witness an increase, when activities pick up. Another major cost contributor is the logistics of HCI, it is costly and inefficient, as it concentration in the water when transported. Locating a closer source of HCI is beneficial.